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Ponzi scheme cases have, of course, become a staple of SEC enforcement since the discovery of Madoff’s unprecedented scheme. While there seems to be a virtually endless number of these cases centered on the proverbial “too good to be true” scheme, the agency may have uncovered a new wrinkle: The client who not only loses his investment but then joins the schemer and fleeces others. SEC v. Apostelos, Civil Action No. 1:15-cv-00699 (S.D. Ohio Filed October 29, 2015); In the Matter of Scott A. Doak, Adm. Proc. File No. 3-1694 (Nov. 4, 2015).
Apostelos names as defendants, in addition to William Apostelos, his companies, WMA Enterprises, LLC, Midwest Green Resources, LLC and OVO Wealth Management, LLC. Midwest Green Claims to be in the business of investment and real estate management. OVO is a state registered investment adviser.
The complaint alleges that since at least 2010 Mr. Apostelos, WMA, Midwest Green and OVO have raised over $66 million from about 350 investors. Mr. Apostelos is alleged to have made a variety of misrepresentations to induce the investors to part with their funds. For example, some investors were told their money would be pooled with others and placed in stock, precious metals, real estate or short term, high interest loans to small businesses and farmers. Others were told their investment capital would be put into a pooled brokerage account and placed in publicly traded stocks, bonds and options.
In reality virtually all of the funds obtained from investors were funneled to WMA’s bank accounts. The funds were then used to make Ponzi-like payments to earlier investors and finance other ventures of Mr. Apostelos and his wife. Portions of the funds were used for the couple’s personal expenses. The complaint alleges violations of Securities Act sections 5(a), 5(c), 17(a)(1) and 17(a)(3), Exchange Act Sections 10(b) and 15(a) and Advisers Act Sections 206(1), 206(2) an 206(4). The case is pending. See Lit. Rel. No. 23397 (October 30, 2015).
Scott Doak was an emergency medicine physician when he first met Mr. Apostelos in 2005. He became a client in 2007, investing in Midwest Green. Subsequently, he resigned from his position and formed OVO with Mr. Apostelos and others. The firm began operations in 2013.
OVO held client funds in custodial accounts through a registered broker-dealer. The funds were to be invested in publicly traded investments through model portfolios. Clients were charged an asset management fee based on AUM.
In 2014 Mr. Doak began seeking new employment as a physician. In May of that year he decided to wind down OVO and started advising clients to close their account. He advised clients to transfer their accounts to Midwest Green and other vehicles controlled by Mr. Apostelos. Seventeen OVO clients made the transfers from self-directed IRAs.
To induce customers to make the transfers Mr. Doak made various representations. For example, he assured one client that the investment was legitimate and would be safe. Mr. Doak did not tell the client he had not taken any steps to verify the representations. Others were told that Midwest Green invested in real estate and would pay a 10-15% return. Again, Mr. Doak had done nothing to verify the representation. At the time he was making these representations Mr. Doak did not tell clients that he and other investors were trying unsuccessfully to withdraw their funds from Midwest Green and other investments controlled by Mr. Apostelos and that some were threatening to sue. During the period Mr. Doak was paid $86,833.34 from a non-OVO account controlled by Mr. Apostelos.
The Order alleges violations of Securities Act Sections 5(a), 5(c), and 17(a)(1) and (3), Exchange Act Section 10(b) and Advisers Act Sections 206(1), 206(2) and 206(4).
To resolve the proceedings Mr. Doak consented to the entry of a cease and desist order based on the Sections cited in the Order. He also agreed to the entry of an order barring him from the securities business. Mr. Doak will pay disgorgement of $86,833.34, prejudgment interest and a penalty of $160,000.
For more news and commentary on developing securities issues, visit SEC Actions, a blog by Thomas Gorman.
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